What to Watch for From Fed Meeting

The Federal Reserve’s policy committee on Wednesday wraps up its latest meeting, Ben Bernanke’s last as chairman. The Fed’s policy statement comes out at 2 p.m. EST. Mr. Bernanke won’t hold a news conference after the meeting and Fed officials won’t release new economic projections. Here’s what to watch for:

The Federal Reserve building in Washington.

Associated Press

1) Full taper ahead. The central bank looks likely to again trim its monthly bond purchases by another $10 billion to $65 billion.

Fed officials announced the first $10 billion reduction to the program — also known as quantitative easing, or QE — in December, trimming $5 billion each from its monthly purchases of long-term mortgage backed securities and Treasurys. At the press conference following that meeting, Mr. Bernanke strongly suggested officials are likely to make $10 billion cuts at each meeting, provided the economy improves as the Fed expects.

Fed officials have signaled they’ve set a pretty high bar for swerving from that path. December’s disappointing jobs numbers weren’t enough to darken their outlook for stronger economic growth, officials indicated in recent public remarks and interviews. Nor does the recent turmoil in emerging markets necessarily spell trouble for the U.S. economy or financial system, which is what the Fed focuses on.

2) Watch how the Fed describes the economic outlook. The Fed has said it will only change its strategy on the winding down QE if its forecast for the economy shifts dramatically. Officials describe their view of the economic outlook in the first two paragraphs of the policy statement. Any changes there could provide signals that their forecast is shifting on the margins — and therefore clues about whether they may be wavering from the plan to reduce the bond purchases by $10-billion-per-meeting.

Take a look, for instance, at what Fed says about risks to its outlook. The Fed in December added new language saying that officials see “the risks to the outlook for the economy and the labor market as having become more nearly balanced.” That assessment came after months of describing the downside risks to the outlook as “having diminished” since the fall. A change in that view would be big, but seems unlikely at this point.

Perhaps the Fed will make some mention in its statement of the recent emerging-market turmoil, but history suggests it won’t change the Fed’s risk assessment. Over the summer, when global markets reeled at the news the Fed could begin scaling back the bond-buying program, the central bank never explicitly mentioned the turbulence. Instead, officials voiced concern over rising mortgage rates and tightening financial conditions in the U.S. So far, that’s not happening this time, though long-term rates are higher than they were a year ago.

3) What’s the guidance on forward guidance? Right now, the Fed has laid out seven different pieces of so-called forward guidance about its future intentions for short-term rates. Five of them are in the penultimate paragraph of the Fed’s last policy statement, where officials said:

- easy money “will remain appropriate for a considerable time” after QE ends (which according to Mr. Bernanke’s timeline, won’t be until late this year)

- they will keep short-term rates near zero at least until the jobless rate hits 6.5%

- so long as inflation doesn’t rise above 2.5%

- when unemployment reaches 6.5%, they’ll look at “other information” in deciding when to raise rates, including other labor market indicators, inflation gauges and financial developments

-they expect to keep rates near zero “well past” the point when unemployment reaches 6.5%

Fed officials will be discussing their forward guidance at this meeting. Odds are they won’t change or add to these statements yet, but all five bear watching. The jobless rate hit 6.7% in December, having fallen far faster than Fed officials expected, putting pressure on policy makers to figure out how to best communicate future policy plans to the public.

The other two forms of forward guidance are in the quarterly projections the Fed makes about interest rates, in which officials estimate when they will start raising rates and by how much. The next round of forecasts are to be released in March.

4) Look who’s voting now. Mr. Bernanke hasn’t enjoyed a unanimous vote at a policy meeting since June 2011. Will the committee give him one as a goodbye present? His successor, Janet Yellen, surely would like to get started with a modicum of consensus on the policy committee. There’s a new set of Fed presidents rotating on as voters this year to consider. Sandra Pianalto of Cleveland is seen as a centrist and unlikely to dissent; she’s also a short-timer, planning to leave early this year. Richard Fisher of Dallas and Charles Plosser of Philadelphia are both QE critics, and while they may prefer the Fed move faster, they will most likely support steady reductions in the bond buys. Minnesota Fed chief Narayana Kocherlakota, on the other hand, has argued the Fed should be doing more to help the economy. He’s indicated that he’s okay with scaling back QE, but he wants the central bank to lower the 6.5% unemployment rate threshold on its forward guidance.

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